RPS Group plc’s 5% Yield Trounces Unilever plc’s And British American Tobacco plc’s

Why a twice-covered 5% yield at RPS Group plc (LON: RPS) is more attractive than lower payouts at Unilever plc (LON: ULVR) and British American Tobacco plc (LON: BATS)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Big, ‘defensive’ stalwarts Unilever (LSE: ULVR) and British American Tobacco (LSE: BATS) have long attracted dividend-hunting investors, and with good reason.

Consistent cash flow drives constant and growing payouts at both firms, but valuations are getting high, and smaller firms such as RPS Group (LSE: RPS) look even more attractive candidates for a short- to medium-term investment.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

The risk of over-paying

I’m a big fan of investing in larger firms with ‘defensive’ qualities over the long haul. Over a macro-economic cycle, Unilever’s consumer brand driven cash flow fluctuates far less than the cash-generating ability of firms in many other sectors. A similar story plays out with the cash earned by British American Tobacco’s smoking products, which enjoy the added ‘attraction’ of being addictive.

However, the valuations of these dividend-paying stars can wax and wane. If we pay too much to own a small slice of these enterprises there’s risk that our total returns could disappoint in the short to medium term if valuations happen to contract.

Unilever and British American Tobacco both expect single-digit earnings growth for 2016, which makes forward earnings multiples of 20 and 16 respectively look a bit rich. Those forward earnings will cover the firms’ dividend payouts around one-and-a-half times each, but the yields don’t seem to justify the ratings either — Unilever’s forward payment yields 3.2% and British American Tobacco’s 4.5%.   

Cyclical opportunity

Meanwhile, FTSE Small Cap company RPS Group looks much better value. At today’s share price of 221p, the development, environmental and energy resources consultancy trades on a forward price-to-earnings multiple around 9.5 for 2016. The dividend yield runs at 5%, and the firm expects forward earnings to cover the payout just over twice.

The shares are down around 37% from the peak they achieved at the beginning of 2014. My guess is that the share-price fall last year tried to anticipate a much larger collapse in earnings than the 3% dip we saw during 2015. Now, with City analysts predicting a 9% uplift in earnings for 2016, RPS Group looks attractively priced.

The company’s business has a greater element of cyclicality than we find at Unilever and British American Tobacco, which accounts for the larger share price swings as investor sentiment changes. However, the down movement looks like it could be an ‘overshoot’ to me, which is why I think on a short- to medium-term view RPS could deliver investors a decent capital gain as well as a top-of-the-league dividend payment — after all, we’ve seen where the shares are capable of travelling.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

Could my Stocks and Shares ISA generate £30,000 a year?

Over 2m UK citizens make some use of a Stocks and Shares ISA every year. Our writer considers if it’s…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 dividend stocks that can help me fight inflation!

I'm looking at dividend stocks to help my portfolio grow and overcome the impact of high inflation. Here are the…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 bargain UK shares trading at less than book value

Book value is a great way to value a stock. These UK shares are trading at a price-to-book ratio of…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

A FTSE AIM stock I’d add to my Stocks & Shares ISA in July

Henry Adefope highlights a FTSE AIM stock he believes could generate significant upside for his portfolio if he buys this…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m following Warren Buffett and buying cheap dividend shares to build my wealth

I think this cheap dividend stock exhibits similar qualities to the companies Warren Buffett has in his investment portfolio.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 cheap FTSE 100 shares I’m buying during the dip!

Andrew Woods explains that low P/E ratios and profitable businesses attract him to these two FTSE 100 shares.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Down 45% in a year, is now the time to buy Scottish Mortgage shares?

Jon Smith explains why Scottish Mortgage shares appear to him to be good value given their post-pandemic fall.

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

3 reasons why the stock market is falling today

Jon Smith explains several factors that are contributing to the stock market falling today, and his thoughts on them.

Read more »